Is the Pursuit of Efficiency in Healthcare Worth the Gamble?

Chasing efficiency in theory is excellent, but in action, the outputs don’t always reflect the goals. My research team and I are seeing this firsthand in certain healthcare settings.

The U.S. healthcare system has been moving for years to consolidate independent practices. Hospitals are swallowing them up, which should mean better communication, more efficient patient care, and lower costs. But that doesn’t seem to be the case according to some of our research findings, which for the purposes of a recent study published by Management Science [1, 2], we focused on the world of gastroenterology.

Our research has shown that this fast-growing trend, which falls under the general umbrella known as vertical integration – the creation of strategic combinations of healthcare alliances meant to enhance the delivery of healthcare – is actually hurting patients in various ways. The most concerning of which is related to the quality of care they receive.

We analyzed large-scale patient-level national panel data that included 2.6 million patient visits across 5,488 physicians. We focused on the specialty of gastroenterology and documented evidence that illustrated how vertical integration is negatively impacting physicians’ approach to patient care.

More to the point, along with my co-authors from Harvard University, Harvard Medical School, Massachusetts General Hospital, and University College London, we looked at the 20% random sample of all U.S. Medicare claims between 2008 and 2015. We analyzed this data to better understand a variety of patient-provider interactions, geographical locations and services within both independent and vertically-integrated systems.

In the end, our analysis proved that providers drastically alter their care processes after they are vertically integrated. What’s more, we found that this resulted in an increase in post-procedure patient complications.

Some of the changes we observed in care delivery are related to reducing the number of patients that are deeply sedated during the procedure. We documented a reduction in use of deep sedation for nearly 4% of the patients. We found that this is also linked to a tangible increase in post-procedure complications. Our findings indicate that this may be due to the pattern of integrated practices being less willing to allocate high-cost anesthesiologists to unprofitable procedures such as colonoscopy. In addition, we observed that integration increases the overall expenditure. For example, we found that once integrated physicians were reimbursed about $127 more per procedure – a dramatic increase of about 48%.

On the flip side, we found that the integration of providers increased their operational efficiency. Nonetheless, the consequences on the quality of care and expenditure are very alarming.

These differences are not a secret, but until now, policymakers haven’t been able to prove the impact of vertical integration on these factors. Now with this research, there is clear proof. So, the next question is: What should policymakers and healthcare authorities do to mitigate these negative consequences of vertical integration?

One clear answer from our analyses is that the current incentives need to change. By addressing the underlying issues and incentivizing the right behaviors, we could see better long-term results in the healthcare sector. Tied to this, policymakers need to actively monitor and disincentivize risky behaviors post-integration.

In short, despite the prevalent anecdote, the current trend in vertical integration may not be what’s best for patients or the U.S. healthcare system as a whole.

Using our analyses, we urge policymakers to carefully reexamine the incentive system and pay more for deep sedation. Providers would see an additional expense, but it would alleviate the negative effects on patient care. This is just one example of how incentives could be better aligned.

Our study makes it clear that vertical integration is not a hard-and-fast solution. Current financial incentives do not guarantee improved patient care. Positive patient outcomes can be better achieved by monitoring post-integration provider behavior and better aligning post-integration financial incentives.

These, however, need to be done with a sense of urgency. Vertical integration is happening fast within the healthcare system, so it is imperative that policymakers act soon before more patients pay the high price of integration. Simply said, the public cannot afford to wait.

References

1. Soroush Saghafian, Lina Song, Joseph Newhouse, Mary Beth Landrum and John Hsu, 2023, “The Impact of Vertical Integration on Physician Behavior and Healthcare Delivery: Evidence from Gastroenterology Practices,” Management Science, Forthcoming.
2. Eric D. Shah, 2023, “Commentary on ‘The Impact of Vertical Integration on Physician Behavior and Healthcare Delivery: Evidence from Gastroenterology Practices,’” Management Science, Forthcoming.